The IRS explained in Notification 2014-21, 2014-16 I.R.B. 938PDF that virtual currency is recognized as property for Federal tax purposes and included instances of how traditional tax laws that apply to financial transactions property also apply to virtual currency. The commonly asked questions hereafter referred to as “FAQs” the following build upon the examples given in Notification and apply the same well-established tax concepts to additional circumstances.
Virtual currencies: What is it?
A virtual currency is a virtual representation of value that serves as a means of exchange, a measure of wealth, and a medium of exchange but is not a representative of any U.S. dollar or a foreign exchange actual money. Some digital currencies are transferable, which means they may be exchanged for real money or be used as an alternative to it.
Cryptocurrency: What is it?
Cryptography safeguards transactions that are electronically recorded on such a distributed ledger, including a blockchain, using cryptocurrency, a virtual currency. An on-chain transaction is a bitcoin transaction that is documented on a distributed ledger; an off-chain transaction is a transaction that is not documented on the distributed ledger.
When I exchange my digital currencies for actual cash, will I gain or lose?
Yes. Subject to any restrictions on the mortgage interest deduction of capital losses, you must record such a capital gain and loss on the sale of virtual currency.
How can I tell if my profits and losses are capital gains and losses over the long or short term?
You will see a short-term cash flow statement if you owned the virtual money for less than a year before selling it or exchanging it. You would have a lengthy capital gain/loss if you maintained your virtual currency for even more than a year and then sold or exchanged it. The holding period, also known as the period in which you owned the virtual currency, runs from the day you purchased it until the day you sell it or exchange it.
How can I figure out whether I made money when I sold virtual currency vs real money?
Your gain or loss, which you must disclose on any Income tax statement in U.S. dollars, will become the discrepancy between your annualized basis in virtual currency and the sum you obtained in exchange only for virtual currency.
How can I calculate the value of the virtual currency I bought with real money?
Your basis, commonly referred to as your cost basis, is the total amount you paid to purchase the virtual currency in U.S. dollars, including any fees, commissions, and other acquisition charges. Your adjusted basis, expressed in U.S. dollars, is your basis, boosted by specific expenses and lowered by specific deductions or credits.
If I offer a service to someone and they pay me with virtual money, do I have income?
Yes. Whether you execute the services as an employee or not, you must recognize ordinary income when they receive property, particularly virtual money.
When I sell a product or service and get compensated in virtual money, how can I figure up my income?
The percentage of the money you must declare is equal to the current market value of a virtual currency at the time of receipt, expressed in U.S. dollars. In an on-chain transaction, you receive the crypto money at the moment and on the date, the distributed ledger transaction is recorded.
How can I calculate the value of the virtual money I receive in exchange for my services?
Your basis in virtual currency has been the fair market worth of the virtual currency, expressed in U.S. dollars, at the time the cryptocurrency is received, if you presented someone with services as part of an arm’s length transaction and got virtual money in return.
How can I figure out whether I made money or lost money when I traded my virtual money for other assets?
The distinction between the reasonable market value of the item you got and your adjusted base as in virtual currency traded constitutes your gain or loss.
How can I calculate the value of the property I received in return for virtual money?
If you exchanged virtual money for another item in an arm’s length transaction, your basis in that item is the other item’s fair supply chain value at the moment of the exchange.
How can I figure out how much money I made from the bitcoin I got after a hard fork?
After a hard fork, if you receive cryptocurrency through an airdrop, you will have cash inflows based on the fair market cost of the entire cryptocurrency at the time the transaction is entered on the distributed network, assuming you have rulership and control over the cryptocurrency and can transmit, sell, exchange, or is otherwise dispose of it.
What is the duration of my virtual currency holding term which I acquired as a gift?
The time that perhaps the virtual currency had been kept by the person through whom you got the gift is included in your holding period for the virtual currency that you were given. Your holding time, however, starts the next day after you received the gift if you do not have any proof of that person’s waiting period.
Should I have to report any income, gains, or losses if I contribute virtual money to a charity?
You won’t record any income, gains, or losses from a virtual currency gift to a charity covered by Internal Revenue Code Chapter 170(c).
How can I recognize a virtual money unit?
An individual virtual currency unit can be identified by recording its one-of-a-kind digital identifiers, such as a confidential key, public key, as well as location, or by records that detail the transactions for all of a given virtual currency, like Bitcoin, that are stored in a single account, wallet, or address. This information must include the following: the dates and times of each unit’s acquisition, your basis and each unit’s fair market value at the time of acquisition, the dates and times of each unit’s sale, exchange, or other disposition, and each unit’s fair market value at the time of sale, exchange, or disposal, and the sum of cash or even the price of the property did receive for each unit.
Virtual currencies like Bitcoin are an innovation of financial services technology and goods that might allow more transparent and effective international trade. Bitcoin may reduce transaction costs for businesses and become a significant method of processing electronic payments because it doesn’t rely on middlemen. Because of these characteristics, the authors believe that Bitcoin has a definite potential for expansion. Virtual currencies may, of course, be used for laundering money and other illegal acts just like regular currencies.